Answer to Question #195528 in Economics for zara

Question

GoGo Airline's parent company is planning to take a cautious approach in launching MegaSaver. In response to the concerns raised by several shareholders, the parent company is exploring the possibilities of dividing its airline business into two distinct departments and monitoring the working capital of the new airline to prevent any liquidity crises. The parent company has requested that you prepare a report which can enable it to make an informed decision.

You are required to include the following information in the report:

Critical evaluation of the advantages and disadvantages of divisionalisation to the parent company

Explanation of various techniques the parent company can use to measure the performance of the proposed divisions and divisional managers

 

Explanation of the importance of non-financial measures in measuring performance

 

Costs associated with various elements of working capital and methods of controlling various elements of working capital

Answer 1

A divisional organizational structure gives a larger business enterprise the ability to segregate large sections of the company's business into semi-autonomous groups. 

Divisions work well because they allow a team to focus upon a single product or service, with a leadership structure that supports its major strategic objectives. Having its own president or vice president makes it more likely the division will receive the resources it needs from the company. Also, a division's focus allows it to build a common culture and esprit de corps that contributes both to higher morale and a better knowledge of the division's portfolio. This is far preferable to having its product or service dispersed among multiple departments through the organization.

A divisional structure also has weaknesses. A company comprised of competing divisions may allow office politics instead of sound strategic thinking to affect its view on such matters as allocation of company resources. Thus, one division will sometimes act to undermine another. Also, divisions can bring compartmentalization that can lead to incompatibilities. 

Because many non-financial measures are less susceptible to external noise than accounting measures, their use may improve managers' performance by providing more precise evaluation of their actions. This also lowers the risk imposed on managers when determining pay.

Working capital costs (WCC) refer to the costs of maintaining daily operations at an organization. These costs take into account two different factors: the company's short-term debt position and the current portion of long-term debt, which is generally the portion of debt due within the next 12 months.